Large Means-Tested Pensions with Informal Labor Markets: Evidence from South Africa

Abstract

We investigate how means-tested public pensions interact with the informal sector, by exploiting a reform in the noncontributory old-age pension system in South Africa, where the eligibility age was lowered from 65 to 60 for men. By employing a difference-in-discontinuities (“diff-in-disc”) approach, we show that this reform triggered a large drop in elderly male employment. The response at the extensive margin comes from informal workers, who drop out of the labor force, while formal employment is mostly unaffected, despite the implicit incentive to draw benefits and simultaneously work informal jobs. This heterogeneity is not due to the lower earnings in informal jobs; at the same level of hourly earnings, informal workers drop out, while formal workers do not. Overall, we argue that this response is indicative of the “subsistence” nature of informal employment in South Africa, in particular, among the elderly.